Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
—
If you missed our last episode, be sure to listen to Ask Marco — Equity Acceleration, Book Recommendations, FHA Loans, Turnkey or DIY, Pay-off Loan or Not?.
Enjoy the show!
– – – – – – – – – – – – – –
Learn more about Your Roadmap to Real Wealth.
Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See our available Turnkey Cash-Flow Rental Properties.
Please give us a RATING & REVIEW (Thank you!)
SUBSCRIBE on iTunes | Stitcher | Podcast Feed
[spp-player]
Chewing The Financing Fat with Aaron Chapman
It’s my pleasure to introduce you to Aaron Chapman. He is a 21-year veteran in the financing industry with a focus on real estate investing and investors. He has a team of eleven staff members. His focus is on financing investment loans. Aaron has become a good friend of mine over the years. He’s been married for years. He has four kids and he continues to volunteer with the local sheriff’s department in the rescue unit and he’s been doing that for years now. Aaron, welcome to the show.
Thanks, Marco. It’s good to be with you.
It’s good to have you back. Aaron, we’re not going to talk specifically about loan products and interest rates here. This is a broader macro and economic perspective on what rates are doing, where they’ve been and where we’re going. How it’s going to impact you as a real estate investor, how you take advantage of the lending environment and all those good things. I’m not sure where you want to begin, but a lot of people ask us the question what are rates doing and where are we headed? It’s a crystal ball question sometimes, but why don’t you start off by giving us some commentary on that?
That is a very common question for myself. That question does route its way through your team quite often. That is something I’ve tried to spend a lot of time understanding. It’s the point that I’ve had some people come up to me after presentations where I speak publicly is that, “What is it you do again? Are you an economist or are you a wealth management guy?” I go, “I’m a lender. I do a regular Fannie-Freddie mortgages, the 20% down stops. If you’re looking to buy houses for investments, single-family, a duplex, triplex, fourplex, there are other options we’ve got beyond that that I’ve access to and even beyond the ten finance properties of Fannie Mae. We’ve got some cool 30-year loans with that. That’s what breads my table, but I find it’s necessary that a person in my position should understand what’s driving that market. What’s driving the interest rates? What would we expect as real estate investors because I’m an investor myself for the future?” The way that I answer that question is to go backwards, to understand what has created this whole process to begin with. You’ve seen The Big Short?
It’s a great movie. I watched it three or four times.
I’ve seen it ten or twelve times. I’ve got it on every one of my electronic devices. I’ve got it on my phone. I can go to my Google account. I’ve got it downloaded on there, so if I’m on a plane or an airport, I can go watch it again because there are tons of little good nuggets in there. I ask all my investors if they’ve seen it. If they haven’t, I told them they’ve got homework that weekend, watch it at least three times because what it does is it keeps you all the way back to the beginning. Lewis Ranieri was the name of the individual working with Salomon Brothers that created the mortgage-backed security. He was able to convince pension funds to take their funds. Instead of investing into stocks, regular bonds, currencies or commodity trading of any sort, he convinced them to go into a pool of funds that the banking industry can pull from and use to fund mortgages. The security is one, you’re securitizing a piece of real estate. Then you have a person’s promise to repay. You have two good security instruments, a note and a lien on a piece of property.
One of the famous statements in that movie is, “Who doesn’t pay their mortgage?” Fast forward into the 2008 range, you get to see who doesn’t pay their mortgage because we see with the social experiment of giving people homes who can’t afford them failed. What that does is it illustrates what happened in the market. We ran out of people borrowing money in a way. I can’t say we’ve ran out, but it started running leaner. There were less people borrowing it than there was going to lend it through those channels back in the mid ‘90s. That’s when you started seeing them getting recreative with the zero-down loans. Then they started getting into the no-income loans, no-asset loans and then it came all crashing down. Anybody who had their money in that market pulled it all out. Right around August 2007, we started to see that dry up. There was not a lot of money to lend.
You get into late 2008 where the Federal Reserve gets together. Ben Bernanke and Hank Paulson sit everybody down, so we’re going to start quantitative easing. That was when the Fed decides we’re going to start putting our money into the market. It showed that between January 1, 2009 and at the end of March 2010, five quarters went by, they had injected through the Federal Reserve $1.25 trillion into that mortgage-backed securities market. That is $83 billion a month going into that market. That’s a massive amount of money and there are not enough people borrowing that. They weren’t borrowing that capital. It was shaking the people out of the trees who were afraid to borrow were now climbing down out of those trees and thinking, “It’s cheap now, maybe I should start borrowing money, maybe I should start buying houses.” It spurred the housing market to start getting traction again.
They had to start slowing that process down. Instead of putting $83 billion a month in, it tapered down $20 billion, $30 billion, $40 billion, until you start getting into 2017. We saw those peaks from that time. From the end of the first quarter of 2010 into 2017, the peaks were around $44 billion averaging probably into $20 billion per month. At the end of 2017, we had our new Fed President. His last name is Powell who took over for Janet Yellen. He decided our economy is doing awesome. It’s strong. We’re going to do quantitative tightening. When he decides this quantitative tightening process, they were going at that point pull back on what they were injecting in the market. There’s a draw on the amount of money being borrowed from those pools. The banks are pulling from it to lend out, but there’s less money going in.
As the money is starting to shrink going in, there’s still a draw coming out, the value or at least the amount of funds in there were dropping. The supply was dropping. As the supply drops, the cost goes up, so it’s a supply and demand thing. The rates follow suit. As the supply drop, the rates will go up along with it. In December, I was lucky, many investors were in the high fours. Now, we’re getting into this position in the high fives and low sixes. We’ve seen things increase rate-wise as a result of this supply of funds dropping. It helps people to understand where it’s coming from because if you’re hopping from bank to bank, you’re not doing yourself any good because all our money comes in the same place. It comes from these mortgage-backed securities pools. One of the interesting things that I find with this, do you remember back during the election when we were getting a new president? What was the anticipation for the stock market if Trump became president?
It would fuel the market and we’d see a big bump.
That was the end result that did happen. I anticipated that it would crash. If you remember all the votes were being counted, the stock market was crashing. The futures trades were crashing badly, a thousand points as they were counting the votes. Then the market opens and it recovered everything. What happens though, if money moves into stocks, it’s got to come from somewhere. It came from the bond pools. This was the election. The next day when the market opened, stocks soared and the mortgage-backed securities market plummeted. That drove rates up quite a bit almost overnight. There is such a fast trajectory. You get into the point where we’ve been on that trajectory ever since. The rates have been going up ever since.
One thing that I like to point out to folks that are fearful about the interest rates going up, they’re thinking is now a good time to still be getting into financing and investments because rates are going up? My cashflows are going down. My cost is going up. The cost of housing is going up. Supply is shrinking. Cashflow is shrinking. One of the things that I like to illustrate is a client of mine bought in Memphis, Tennessee. He signed on that contract the end of October, early November in 2017. Two new built homes, the same floorplan, the same price and the same potential rents. The only difference was one was about finished, they’re working on the trim work, the other contract he signed for basically the same properties down the street that he had to break ground.
When we closed on property number one, it was in December the interest rate was 4.75%. Fast forward six months, he’s ready to close in May of 2018, in almost identical property, interest rate was 5.75%, a whole percentage point. He called me up and said, “I’m thinking about canceling the contract for property number two.” I was like, “Why would you do that?” He said, “Because I’m losing $600 a month.” I go, “Explain to me how you’re losing $600.” He goes, “1% interest when you figure factor that in, it goes up to about $49 and change every month in total difference in payment. Therefore, I’m only getting the same amount of rent. It’s about $600 a month, I’m making less on property two versus property one.” I asked him if he doesn’t mind going through an exercise with me and he agreed. I asked him to go to his accountant, dig out what the anticipated taxes were to be like if this could be similar to last year. Then factor in the taxes he would pay on the cashflow for property one versus property two because there’s higher cashflow therefore higher taxes, and what was his tax deduction going to be on the interest rate for property two versus property one because that’s higher interest. By the time he was done with that equation at his tax brackets, it was like 30% federal, 10% state, instead of being $50 a month different by time his taxes were done, he’s $3.55 per month different. It was inconsequential.
What I want to share with folks is even though the rates are going to go up, we’re going to continue to see this movement, what we’re seeing here is not something to be so scared of. The reason they shouldn’t be so scared of it is because if you’re a real estate investor, you’re going to be able to take advantage of the tax deductions that have been created around real estate. That right there offsets up so much of that that you need to look at this as a bigger picture. The revenues and the benefits of real estate come from more than a cashflow.
There are five dimensions to it. That chart showed a rapid drop in that trendline right after the election and it continued to go down and down to the point where it’s at now, which looks like it found some bottom temporary or otherwise. Do you foresee this trend continuing into next year where we’re going to see another rate increase on the mortgage front? I expect to see a rate increase probably later this year by the Feds. Do you think mortgage rates are going to continue to go up here over the next six to twelve months?
That all depends upon what ends up happening with our stock market, our economy. Interest rates usually are going to go up when they believe the economy is strong and it’s continuing to thrive. Let’s go backwards a little bit and see what the impetus was behind Fed President Powell’s decision with this that governs over the Fed to decide to do the quantitative tightening. They’re saying, our economy is doing better. What’s the biggest sector of our economy?
Probably housing.
It’s the consumption. 72% of the US GDP is consumption. Interestingly enough, I had heard from a former member of the Central Bank indicated that 19% plus of the global economy is the US consumer. When we look at that, the majority of what goes on in our economy, what drives our GDP is consumption. We look back in 2017, it showed that 5.5% of a person’s income was being saved. That was at least what they were looking at first quarter of 2017. When we get to quarter four of 2017, it had dropped down to 2.4% of their income. We’re seeing that savings is dwindling, but spending was way up. Credit was way up. People were borrowing more even it wasn’t necessarily for housing. They were borrowing for consumer goods and also defaults were up on consumption goods. You start seeing that our economy is that stable.
There’s new data coming out showing that there is some weakness in the economy, more weakness to what’s being published. If that’s the case, and this weakness continues and it starts to erode at this especially since the savings is dwindling. Incomes or at least wages are not pacing inflation very well or cost of living, whatsoever. If it starts to go like that, there are a lot of analysts saying stocks are going to wane. If they wane, that money is going to go somewhere. While the mortgage-backed security is more secure than it was in the last twenty years just because the underwriting has gotten so tight because we have to have qualified certain ways. If you look back into the creation of that, it’s very clean, secure funds until they started getting into the ‘90s and getting very irresponsible. That was all because they wanted housing; this American dream thing. That’s changing. Looking around the internet, I started finding this article popped up where it says the Wall Street Journal saying that Americans are now saying, “Renting is cheaper than owning.” Freddie Mac did a study and 78% of people now say that renting is more affordable than owning. That’s a big deal.
As an investor and a landlord, I know that the rental pool out there probably nationwide is growing and that just means there’s more demand for rental housing. If fewer people are buying homes and they still need a place to live and our population is growing, which it is year-over-year, they need to go somewhere. This is where we come in as real estate investors.
We know the cost of housing is going up as far as the acquisition of it. It’s outpacing those people’s wages and their ability to afford that. That was even part of this article, David Brickman, the president of Freddie Mac and the head of his Multifamily Division cautioned that renting remains unaffordable for many families but buying lately has become even more unaffordable. He’s saying buying is increasing in unaffordability. When he’s talking about renting being unaffordable, we have to look at what markets he’s probably talking about. I love to find that out. That’s got to be your coastal markets. What that does is forcing people into lower income housing. It’s not that renting as a whole is unaffordable but renting in certain areas may become more unaffordable forcing people into a lower-income housing bracket. Therefore, most of the investors who we work with or all the investors we work with are positioned to being able to have a bigger flood of potential tenants.
He’s probably referring to the coastal markets because everything is unaffordable in the coastal markets. There is no such thing as affordable housing, it doesn’t exist. The politicians talk about it all the time. They can’t seem to put a project together that is essentially an affordable housing project.
There are barely affordable groceries in the coastal markets.
Cost of living is high, but if you focus on the states and markets that we folks stay focused on the Midwest down through Texas, on out through the southeast and then pockets up in the Northeast, you can still reasonably buy a three-bedroom, two-bath house between $100,000 and $300,000. Many of those properties make sense from an investment perspective. When you look at this data which does spill over throughout the Midwest and throughout the rest of the country, it’s still positive news at least for us as real estate investors.
It’s not good if you’re out there and you’re trying to buy a home and if you’re a Millennial trying to get into the market and get your first property, your first house to live in. I don’t think this is an issue. It’s not a great scenario, but it does play out well for us as investors with a growing rental pool. You were talking about rates and the direction rates were going, wrap that up or finish that up. I always look at trends, but I like to see where trends are going. You said it depends, where do you see rates going? I’m trying to get you to make a prediction here.
It is hard to predict or establish. They are very bullish on the mortgage-backed securities market. If we look at this whole position, I might get in a little bit deeper in about the six-month mark here, we’ve seen this drop as much as it has. Analysts are saying that they’re bullish on the fact that we should be recovering a lot of this ground that we lost because the stock market itself they believe even though we’ve been losing ground in the stock market last month and these last few days are trading pretty strong, they think that’s like a sucker punch. It’s one of those things where they’re trying to get some people interested in going back into stocks so those market movers that are pushing the stocks up right now can sell their stuff and get off from underneath it and add a little bit more of profit.
If that does happen, traditionally you can see a market make back about half of its losses during the most recent downward trend. That would put us keenly on making back about 50 to 60 basis points in the mortgage-backed securities market that could translate to a little bit of a drop back in rates of a 25% possibly. Getting those back solid ends of the fives again, it’s hard to say if it would do that. If we went back and retraced what we lost in the last year since the real downward trend started back when the Fed announced the quantitative tightening that puts us right back, we’re going to gain back somewhere in the range of about 250 basis points possibly. That could be a very big game changer for us and get us back into the low fives. Maybe even potentially bridging the fours again for investors. It’s hard to say what’s going to end up happening. It could very well be on the run where we start getting into the high 60s again possibly bridging the sevens. If you look backwards to 2006, do you remember what rates were looking like back then?
They were around six and a half, weren’t they?
Yes, for your owner-occupied. When you started getting into the investors back then, we were writing loans in the very common high sevens and low eights. I found some old market data on a presentation that somebody at Chase had created. He started looking at the actual cost for rates back then, looking at the different notes, different coupons that were available, the rates we have now. I’m spitballing what it might be for a different investor. Let’s say five and three quarters now was like a point. Back then in 2006, when there was no Fed involvement which is where we’re heading, minimal Fed involvement to none, all driven by the market. Back then, the interest rates when people were interested in mortgage-backed securities, putting money into mortgage-backed securities, five-and-three-quarter rate for an investor was costing somewhere in the tune of nine points. Right now, it’s one to two or one and a half, somewhere in there. When you add that contrast, we’re still in really smoking position compared to where we were before the crash. There’s still some pretty solid interest in this particular security because of exactly how more secure it is than it was back then. That’s my interpretation of that data.
Based on your chart and what you’re saying, my prediction is that rates are probably going to stay pretty stable. They might gyrate up or down a quarter point, but there’s more of a chance of the rates going up than down at this point. Let’s assume they stay the same or they inch up a marginal amount. What do you think that means for the real estate investor in 2019?
It’s going to shake out quite a few that don’t understand how interest rates don’t have as big of a play on their end goal as they believe it does. Acquisition and ownership of the property is the biggest play. One of the things I started off with when it comes to speaking with a new investor I asked them this question, “If you bought a piece of real estate that you put your 20% down and you never made a single dollar in cashflow and never went up a single dollar in appreciation, but yet you didn’t need to put another dollar into it to maintain it or deal with vacancy, and it took care of itself. The entire 30 years that you own that loan, are you making any return?”
You are.
Let’s say it’s a $100,000 acquisition. We’re putting 20% down and you’re going to finance, how much, Marco?
You’re financing $80,000, you’re putting $20,000 down.
Take that $80,000, calculate this number and divide $80,000 by 30, that’s how many years it’s going to take to pay it off. You divide that by 30 years is $2,666.66. Go and factor that into the original $20,000 that you moved over into that. It’s like a million to security. You’re moving from a liquid account cash and then move that over into a piece of real estate. It’s still your money, you just moved it where it’s not so accessible. You divide that $2,666.66 into the $20,000, what do you get?
That would be 13.3333%
You are getting 13.33333% gain on your $20,000 every year averaged over 30 years. The next question I ask is what is inflation doing to your cost of living?
It’s lowering the purchasing power of the dollar, so inflation is eroding your purchasing power. Please tell everybody what you’re doing.
It’s pushing your cost of living up. Cost of living is going up, which you can do for your tenant. You can bring their cost of living up. You can raise rents, but can the bank raise your payment? No, you’re locked for 30 years. You get to outpace inflation for the next 30 years because they can’t adjust that. Let’s say the government said it’s 2%. We know that’s crap. Let’s be kind to them and say it’s 3%. Let’s say inflation is 3% because there are certain things they take out of it. I think it’s even more than that, but let’s say 3%. If you take 3% that you’re outpacing by having it stuck there flat for 30 years and add that to your 13.3333%, what do you get?
$80,000 times 0.03 is 2,400.
We add that 3% to the 13.33%, you’re bumping up to 16.33% and you’ve never even had to put a dollar in your pocket yet. You’re making potentially 16% plus without putting a dollar in your pocket. Then we start getting into the next steps of this of where’s the value at. The other value happens to be we can go into tax deductibility of it, but I’m going to set that aside because that’s between you and your accountant to worry about. Where is your $20,000 protected from? The three big protective pieces or at least the three things you are protecting it from, I think the most important ones. What would you claim them to be?
Inflation would be the first. The fact that it’s a hard asset and you’ve parked it into a hard asset, you’ve lost the volatility of paper assets like the stock market. You have to maintain the commodities above the dirt, but you’ve got the stability of the land.
What can the banks do nowadays if they fall into trouble with your deposits?
They can call a note if they wanted to.
True, but in that situation, I don’t know that that’s the case because like we’ve always said if you owe the bank $1,000, it’s your problem. If you own $1 million, it’s their problem. From what I understand the rule is now they can take depositor’s cash and issue stock if they’re in a floundering position. I’m out of stock for a reason. I don’t know if I want to have more stock in something that we know is going down, so that you’re protected from. The final thing that is our biggest risk for our cash is ourselves. I could easily take that $20,000 and turn it into a boat. That is not a good investment unless you’re using that boat to make money and take people on tours. For the most part, those are the three things that we’re protecting ourselves by putting into real estate.
It’s a forced savings plan is what you’re saying?
Yes, and a protected piece. It’s a force saving but also you’re avoiding three big issues out there that you have no control over. You can control yourself a little bit, but I know a lot of people can’t. You’ve got inflation and the bank’s ability to take those depositors’ funds. Those three things are protected piece. On top of that, you’ve got any cashflow you get whatsoever. I could go into looking at $100,000 acquisition even in this market with interest rates going up. It’s very probable and plausible that a person can at least realize $250 a month in cashflow on a $100,000 piece of real estate before you factor in maintenance and vacancy. If they’re able to get that before they deal with any maintenance or vacancy, they can use that $250 to pay themselves back the closing costs. Any cost that you had to put in above your down payment within 24 months, you can put back in your pocket.
You put back your costs in your pocket within 24 months. You’ve got your $20,000 slowly growing to a $100,000 because if somebody is paying off that note and if you take 24 months to pay yourself back with that $250 a month, that $250 can generate another $84,000 over the remaining 30 years. With that, you have now made $164,000 after paying yourself back the closing costs that you use to build your business and you have your $20,000 still sitting there because that’s your investment into the property. It’s generated $84,000. It’s also generated another $80,000 because of the payoff of the lien and a lot of people say, “What about that maintenance and vacancy factor?” I say let’s say it’s 40% of the original price that’s $40,000 to maintain that property for 30 years. If you buy right, if you’re the right runner, if you run your business correctly and you purchased properties that will stay rented, that you can offload a lot of that expense because you bought it right, not to replace the roof more than one time in that 30-year window. You’re not replacing mechanicals more than one or two times in that 30-year window. You should be able to maintain that property for 40% of that acquisition price. You back the $40,000 off the $164,000, you still have $124,000 clear profit after you paid yourself back. You still have your $20,000. You have $40,000 for all contingencies. That’s before rent raises, appreciation, tax benefits are hedged against inflation.
That makes it a pretty sexy investment.
You can’t get sexier than that. I’ve tried looking.
I was just talking to Sean Haas about this and I was telling him there are so many ways to make money in real estate. You don’t even need to be an active real estate investor to do it. It’s just built into the cake. It’s baked into the cake. You’re hard pressed to find anything that beats investment real estate.
I do between 600 and 700 transactions year-wise. I’ve financed some of these acquisitions of their single-family or multi-unit property, and I get to see many people have ten, fifteen, twenty properties. The one thing I see that’s amazing about it is the tax benefits that come from that and how I’ve seen some people are with zero taxes anymore. What that tells me is it also enables freedom. If you had the capability to direct where your tax dollars go, their tax dollars that they would normally see come out of their income and fund whatever it is the federal government and the state government wants to. They now get to decide where to put that because they are continuing to contribute to the housing and contribute to jobs. If we follow the same program that the government is trying to follow, they make it capable for you to have the freedom to choose where to put your own tax dollars, which is building your little empire. That is another unintended benefit that we get to have is the additional freedom to choose where to put that money.
Is there a place where investors mess this up? Meaning they either take the wrong strategy with financing their investments, their real estate investments or maybe underutilized what they could take advantage of when it comes to mortgages financing? Because it’s powerful, it’s five to one leverage. Rates are still cheap. I don’t care whether you call 4%, 5%, 6% or even 7%. It’s a no brainer to take advantage of it, but are the investors are screwing it up in the sense that they’re not using it properly?
Two things they’re screwing it up with. One is shying away from it because they’re listening to what’s going on in the media about rates that are going down. They’re getting skewered that they’re not making the revenue. They’re treating it like consumers would treat anything. 72% of US economy is consumption. They’re thinking like consumers, “What’s going in my pocket? What’s coming out?” They’re not thinking about, “I am just moving that money someplace else where it’s more secure and it’s growing faster than anything else,” and failing to see all these benefits we talked about. It’s hard to wire a big chunk of money. I had to do that twice in the last two weeks because I’ve closed on two more properties even in this higher rate environment. I just closed on two of them at 6% and an 8%, and it doesn’t bother me. I willingly went in there and wired the large sums of money because it makes so much sense.
Number one is we are having a hard time getting passed that consumer mindset. The other is trying to make sense of something when they don’t understand. Get a good team. Quit trying to go off the internet and read there what it all says and then go, “I’m going to do it on my own.” The second that person does that they have now basically put them in a position to accomplish what they can with their own best thinking at a very inexperienced level. Experience is everything. You’ve heard the term good judgment comes from experience and experience comes from bad judgment. If that person wants to get the experience, they have to go through the bad judgment. It’s much easier to go through the bad judgment of other people.
I’d see 600 to 700 transactions a year. I get to see a lot of judgment that worked. You see 600 to 700 transactions a year. You see a lot of people’s judgment at work. We get to see how they respond to those issues, the decisions they make and the outcome. Why would you go on this by yourself when you can go to myself and yourself and your team and my team who are battle-worn veterans? I’ve been doing this for years now. I’ve got a staff, Ellen, who’s been doing this since 1983 with a staff of eleven. We have a 600-plus per year experience transactionally, which is equal to eighteen years for the average person in my industry. My one year, if they’re eighteen, I’ve got eleven of us. There’s a lot of stuff you’re leaving on the table if you’re not talking to a good solid group of people.
That’s completely leverageable. All of our shared experience including the failures is experience, free knowledge that we can pass along to a new or even a somewhat seasoned real estate investor and help them to grow bigger and faster. One hurdle investors bump into is the debate of good debt versus bad debt. The thing is that people still think that all debt is bad debt and that’s not true because debt will make you wealthy. I will probably argue that you cannot get wealthy without taking advantage of leverage, without taking advantage of good debt. Here it is, it’s available to all of us provided you qualify. People are cutting themselves short when they ultimately realize that they can get to where they want to go financially a lot faster by taking advantage of what you have to offer.
I don’t even like to call it debt because good debt, bad debt, that is a poor use of the word to begin with because this isn’t debt. You’re taking on a business partner. Think about it this way. There are many people who have taken on partners before and say, “We’re both going to put up 50% of the funds. We’re going to put out 50% decision making capability, 50% of the ownership and we’re going to take 50% of the profits, and take 50% of the risk.” The problem with that is you can be stuck in a situation where you are butting heads with this individual, and you can be at an impasse then nothing moves. This scenario, you’re taking on a partner in the form of this loan. They’re going to put up 80% of the capital. You, the investor putting up 20% of the capital because this is truly a business. This is a cashflowing business based on a real estate asset. You’re literally buying a business for the market, buying this whole asset. That’s a whole other benefit that we can get into on a whole other level.
You’re taking on this partner, they’re willing to put up the majority of that capital to buy this business or expand these businesses of yours, but they’re not taking a damn bit of ownership. People feel that they are but they’re not. They have terms. As long as you make sure that they get in nowadays market their 5.8% or 6% of their 80% in twelve installments every year, they’re out. They leave you alone. They have no decision in it. They get no profits. They don’t even get the benefit of inflation. You get to pay them off with inflation over your time. I don’t think calling it debt is even right. Anybody who is calling it even good debt is taking too little time to describe what it is. This is a partnership that you are leveraging way beyond the 80%. Whoever is putting that money up in reality is getting screwed.
Banks know this. The US as far as I know is the only country in the world that offers a 30-year fixed rate product, even a fifteen-year fixed rate loan product. The banks know they’re losing, but they fully expect that most of these loans as in like 97% of these mortgage loans will be refinanced within the first five to seven years. They’re banking that the majority of people are not going to keep the loan forever. They’re ultimately going to sell that property and refinance into whatever the rate in terms are of the day. You and I as real estate investors taking advantage of this cheap financing and keeping it for 30 years, we have inflation as our other partner. It’s working for us. It’s inflating away that loan whether it’s 3% or 6% a year. That’s money in my pocket because I’m going to continue to pay that $500 mortgage payment. In five, ten years from now, that $500 mortgage payment on the mortgage loan I got for my most recent property is going to look like, I jokingly say, a Starbucks coffee, it’s going to be so small.
We’re little in for 5% in ten years. You’re paying it back with $0.50 on the dollar. In twenty years, you’re paying it back with zero and then at twenty, hardly you’re making money. I encourage people that you’ve got to get in and understand what you’re getting into. If you’re talking to somebody that just wants to regurgitate rates, how do you qualify? Not talk to you about the bigger picture which is how to build your business and safely expand it, I have to have an interest in your business or our client’s business because if I take care of theirs, mine takes care of itself. That’s why we keep growing every year because I spend so much time helping to build that can get that mindset right. You’ve got to think properly and when you start thinking properly, it’s amazing how it all lines up.
What else do you want to talk about? We went into this with a general idea of what we wanted to talk about, but we didn’t script this at all. There was no question, no Q&A here. It was just, “Let’s talk about financing and where the mortgage market is headed.”
There are so many things we can talk about. There are so many different strategies, so many different things that are going to help a person. I’m at a point now I’m bringing my children into it. They range from 12 to 21. I’m building a trust around our future where my children have to participate even at this young age. They have to vote on the investments we go into. They get to interview the people we are investing with. When they start working, start putting 10% of their income into the trust or they never have access to what the trust generates when they turn 65. I am working on a system. I’m working on an entire process to help people to create their legacy and to create it in a way that helps their children to move forward and grow themselves in an environment where they can be safe at doing that instead of, “I’m not going to well-fund a bunch of little jerks. They’re going to run around with a bunch of money in the opinions of society.”
They’ve got to contribute to society but know that they have something in the future to fall back on when the time comes. They are going to participate in the construction of it. We are using whole life policies to fund this. I’m using the whole life with my policy, my wife’s policy and all of my children have them. There are many different instruments that couple along with being a real estate investor that add a stronger foundation. It’s just a matter of me taking the time to sit and speak with every single person that wants to talk about it because I’m doing this myself. I’m not a type of individual who is just sitting back and collecting a commission check for doing loans. I’m actively seeking better ways to build real estate investment businesses by doing it myself.
If someone is thinking of starting to build a real estate portfolio or they’re a real estate investor and they’re looking to grow their existing portfolio, what tips, advice or nuggets would you give to that person?
Go to AaronBChapman.com and set up an hour to talk. I’ve got my assistant who will set that up because each person is a little bit different and I’ve talked to thousands of them. Worst case scenario, it may not be something we do business together on a level lender and borrower. It could be another opportunity to share thoughts and ideas because I get as much out of each person I’ve talked with as they get from me. The relationships are going to be one of the strongest things we can ever have. I believe we live on this world with two things: relationships and experience. The only way to get experience is with relationships, the only way to build relationships is with experience. I’m open to try and do those as often as I can. I enjoy having conversations with people about their business and where they’re at now or where they want to go. We need to be encouraging each other to start making steps towards those tough choices to end up making us better people and giving us a better future.
You’re definitely a good person to speak with and listen to because you take lending to a different level. It’s not just about the product and the rate. It’s more of a strategic and philosophical conversation about why invest in real estate? Why use leverage? What is this going to change in your life? How do I kickstart my investing or supercharge what I’m doing? You look at this more from a macro perspective at least more so than a lot of the people that I talked to.
You’ve got to go macro and then you also have to dive into micro too to make them successful. What I found is all of the banking entities out there have proven you can take a monkey out of a cage, give it a phone and some training and it will close loans. We know that. I have a lot of contemporaries out there. They are very good about starting out guidelines. We all have the same guidelines. I’m very blessed to work with an organization that have found easier paths to get them done. It’s not so complicated as it is with other places and also the beyond ten financed properties. A lot of people are tapped at that Fannie-Freddie 20% down 10% where we’re finding more options out there. There are a lot of better things that we can discuss if we get on the line together. I want to be sure that they understand what they’re getting in working with Norada and your team. What I believe is some of the assembly of the best minds in real estate under one roof, as far as I’m concerned, is your team. You have selected some specific people to fit those roles that identify with the investor better than most that I’ve ever interacted with. I appreciate your continued trust in me and I’ll always want to be here to back you guys up.
I really appreciate all of that. Thank you very much. I appreciate it. One of the big takeaways from this particular episode is this: Don’t get hung up on rates. Mortgages and lenders are a team player and a tool to help you achieve your financial goals. If you look at it that way and you bring it on and you adopt it, you can do a lot of great things with real estate. It’s a tool. You call it a negative thing when I say good debt, but I don’t mean that in a negative context. It is a good tool. The takeaway for me in listening to you is it is what it is. It doesn’t matter whether the rates are 4% or 8%. Learn how to use it to your advantage, learn how to leverage it and learn how to get to where you want to get to faster. Aaron, I appreciate you coming on again. It’s been a blast. We’ll have to get you on every six months or so, so we can keep up on top of all these ideas and where things are headed.
I appreciate you allowing me back on to spout off the way that I do.
Aaron has this amazing braided beard. Is that what you want to call it?
It is a beard. If I take this thing out, it’s wide. It has a mind of its own. You’ll see it starts choking people if I don’t control it. What it boils down to this, 2008, I woke up in the hospital with beard and I was in a wheelchair. I had learned how to walk again. I said I was not going to trim until I learned how to walk again. It’s about almost two inches long when I learned to take my first step again. I left it and let it grow, and I thought you know this is part of me now. This reminds me where I’ve come from. I just don’t shave it off and then I always wear the hat. It’s got a chainsaw logo on it. It’s because in my opinion there is no more powerful and useful hand tool than a chainsaw because all that you can do with it, you take down trees. You can build a house. You can carve a swan if you want to out of ice, people do this. It’s also the most dangerous hand tool because even a slightly misuse can maim you or kill you. The same thing about what goes on between our ears. Our mind is the most powerful tool we have. It can be used for good. You can use to point you the right direction. It can create for you but if misused, it’s destructive. It’s another reminder of myself, one to remind me where I’ve come from and this to remind me of being cautious about what I have available to me and not misusing it.
I always talk to a lot of people about focusing their mind properly. There’s a YouTube video out there by Joe Dispenza. He talked in Tacoma on this. It’s a TEDx Talk where he illustrates and shows an actual neuron connected with another neuron during the process of thought. If you put in the wrong thoughts, you’ll connect the wrong wiring. It’s an amazing thing that I encourage people to look up is that Tacoma TEDx with Joe Dispenza on it, check that out. Once you understand how your mind works when you think improperly, you will be very guarded about what you allow into your mind and that’s where I’m at now. That’s the reason I wear that hat.
Aaron, you’re one of those guys that you’re a smart guy, very personable but if no one has ever met you or seen you with their own eyes, what they hear is almost a mismatch from what they see. This is proof that you should never judge a book by its cover.
I was in New York having dinner with a guy and I was waiting. I told him I was here. He showed up about ten minutes late. As he was walking in, he was looking around. I had to approach him. He moved out of the way to let me out the door as I was coming up, and I stopped in front to put my hand out and said, “I’m Aaron Chapman.” He was like, “What?” He was shaking me and he goes like, “You don’t look like.” I said, “What did you expect?” He goes, “See that guy out there?” He pointed out the window, there was a guy sitting there with a lime green polo on and glasses and receding hair. He goes, “I went up to him and asked if you’re Aaron Chapman because that’s what I pictured when I talked to you on the phone.” It’s cool to see somebody’s reaction.
Aaron, thanks for coming on. This has been great. I hope you have a great day.
Thank you.
– – – – – – – – – – – – – –
Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See our available Turnkey Cash-Flow Rental Properties.
Please give us a RATING & REVIEW (Thank you!)